Jeremy Warner's Outlook: Is inflation still the enemy? That's what King thinks,even if retailers reckon it's falling sales

Belt tighteners won't forgo their holidays - Eurotunnel cannot dig its way out of this

Predictions of an early cut in interest rates, possibly as soon as July or August, suddenly seem premature. Inflation failed to ease as expected last month, and although it is still below target at 1.9 per cent, it remains at a seven year high with the price of services chugging along at a fair old clip.

Predictions of an early cut in interest rates, possibly as soon as July or August, suddenly seem premature. Inflation failed to ease as expected last month, and although it is still below target at 1.9 per cent, it remains at a seven year high with the price of services chugging along at a fair old clip.

More worrying still for hard pressed retailers, Mervyn King's inner hawk was very much in the ascendant again in a speech delivered this week at Salts Mill, Bradford. The Governor of the Bank of England gave a whole list of reasons which help to explain why inflation has been so low for the past ten years and roundly concluded that some of these might now be starting to unwind.

Interestingly, he also referred to a possible indicator of inflationary pressure whose theoretical grounding seems to belong to a by gone age - monetary growth. Any reference to "broad money" will bring a tear of nostalgia to the eye of those old enough to remember how monetary targeting was once at the centre of Britain's anti-inflationary policy. Apparently it has again been rising rapidly in recent months. In the first quarter of this year it rose at an annualised rate nearly double that of the US and euro area, which in Mr King's view represents something of an upside risk.

In the 1980s, monetary targeting failed hopelessly to control inflation and it wasn't until some form of currency peg was brought in - initially by shadowing the German mark and later through the European Exchange Rate System - that Britain was able finally to exorcise its inflationary past. The therapy was effective, but painful, and when finally the ERM was replaced with an inflation target it was a relief to all.

None the less, growth in broad money, which includes bank lending, may still be a reasonably accurate indicator of inflationary pressures to come. Mr King also fears that some of the factors that have helped keep inflation low may be coming to an end. These include rapid industrialisation in Asia, which has caused some import prices to deflate and kept the price of domestically produced goods subdued.

Labour immigration, particularly from the EU accession countries, may also have had a pronounced effect on wage inflation, helping in a very tight labour market to fill certain skill gaps, and enabling many industries, from construction to strawberry picking and old age care homes, to keep labour costs low.

In Ireland, still powerful trade unions managed to win a ruling which forced a Polish contractor employing Polish workers in Ireland on Polish wages to increase the pay to standard Irish rates. That doesn't happen in Britain, enabling the economy to gain the full benefit of lower priced labour. Still, as Mr King remarks, that effect too may have reached its high water mark. It can reasonably be assumed that most Eastern Europeans who want to come and work in Britain are already here. Indeed there is some evidence that some of them have already had their fill and are returning.

If import prices are going to start rising, the marked improvement Britain has enjoyed over the past 10 years in its terms of trade - with export prices rising relative to the price of imports - may also be drawing to drawing to a close. The effect of this would be faintly deflationary, as for the past decade favourable movement in the terms of trade has enabled consumption to rise more strongly than national output.

Much alarmist nonsense has been written about the debt-fuelled consumer boom, but actually the main reason consumption has been rising so strongly is that we are able to buy our goods at a progressively better price relative to that at which we sell our services. Real wages have therefore been rising strongly. It is clear that this process is now slowing markedly, if not yet going into reverse.

The message in all this for the future direction of monetary policy is confused. These influences pull in different directions. In these circumstances the Bank is highly likely to adopt a wait and see approach. The odds on interest rates being left on hold at 4.75 per cent for the whole of this year are shortening fast.

Belt tighteners won't forgo their holidays

Peter Long, chief executive of First Choice, draws much comfort in the face of the consumer slowdown from a survey conducted among First Choice customers suggesting that whatever else people give up when in belt tightening mode, they are not going to give up their holidays.

Some 75 per cent of respondents now apparently regard a holiday as "an essential", not a luxury, while 90 per cent said that even if they were reducing their expenditure elsewhere they wouldn't cut back on their hols. Of the remaining 10 per cent, less than a half said that their holidays would be something they would be prepared to forgo completely.

All these claims should be treated with a degree of scepticism. Holidays are not something anyone would voluntarily give up if in employment, but when leisure is thrust upon you by unemployment, then the luxury holiday in Barbados doesn't look quite so essential as it used to. It is only because unemployment is still so low that people say their overseas holidays are a must buy. Mr Long would be unwise to believe himself entirely recession proof.

None the less, so far the figures do rather back the claim. Retail spending is falling, particularly on clothing and big ticket items, but summer bookings both at First Choice and Thomas Cook are strongly up. Those who are belt tightening seem to be cutting back on goods, not services. This supports the Bank of England's contention that we are witnessing only a slowing of consumption, which shouldn't significantly damage employment prospects, rather than an all encompassing collapse in domestic demand.

Yet Mr Long shouldn't perhaps be so modest about his achievement, which is down to a lot more than trends in consumption. Capacity has been cut and the company has refocused away from the commodity end of the market - three-star hotels on the Costa Brava - towards higher margin holidays in far away places. It seems that far from spending less on their holidays, many of us are determined to spend even more, whacking great credit card bill or not. The result is that Mr Long has got 15 per cent fewer holidays left to sell for this summer than he did at this stage last year. Discounting will be correspondingly less. No wonder the shares have been rising so strongly. Essential is the new luxury.

Eurotunnel cannot dig its way out of this

Acres of column inches have been devoted to the various comings, goings and recriminations on Eurotunnel's now exclusively French board, yet the truth is that whatever the outcome of Friday's annual meeting in Calais, where the chairman is again facing the guillotine, it won't make a blind bit of difference to the future of the tunnel.

Nor will it make any difference if creditors, by now heartily fed up with the rebellious shareholding mob, decide that enough is enough and send the company into administration. The tunnel is there, the capital has been sunk, and it will carry on operating come what may. The argument concerns only who takes the greatest hit in the now inevitable refinancing. Since debt holders - now largely a bunch of vulture capitalists, the original bankers having sold out long ago - seem to hold all the cards, it's hard to see why equity holders think there's anything left to quarrel about at all.

Jacques Gounon, the chairman (until Friday, at least), has invited creditors to write off two thirds of their £6.4bn of debt, which is actually not as ridiculous as it sounds as most current holders would have picked up title to the debt at less than a third of face value. However, the chances of them doing so are precisely zero. M. Gounon, adieu.

j.warner@independent.co.uk